ConocoPhillips reported adjusted earnings of $627 million in Alaska in the second quarter, a year-over-year decline on falling production and increased capital expenses.
But profits were up from the first quarter, due to rising commodity prices and, to a lesser extent, the resumption of liquefied natural gas exports from the Nikiski terminal.
Although prices increased, ConocoPhillips paid slightly less in taxes during the second quarter than during the first, a reflection of recent revisions to the tax code. The More Alaska Production Act, which Gov. Sean Parnell signed in May 2013, eliminated a progressive feature that had increased the production tax rate as oil prices increased.
Even with the decrease, ConocoPhillips still paid some $872 million in state and federal obligations during the quarter, including some $553 million in state taxes and royalties.
ConocoPhillips reported an effective income tax rate of 35.6 percent in Alaska during the quarter, the same rate the company paid in the first quarter of this year and the second quarter of last year. Including other taxes - a figure ConocoPhillips only reports for Alaska - the rate was up to 50.3 percent, down slightly both by quarter and by year.
Companywide, ConocoPhillips reported $2 billion in adjusted earnings in the quarter.
Production downConocoPhillips production continues to decline in Alaska.
The largest producer in the state reported a 2 percent or 4,000 barrels of oil equivalent per day year-over-year decline in total quarterly production to 193,000 barrels of oil equivalent per day, which the company described as “in line with the expectations.” The company saw Alaska production fall 7,000 barrels of oil equivalent per day from the first quarter of the year on normal declines and higher planned downtime for maintenance.
By product, though, the picture was more nuanced.
While Alaska crude oil production fell nearly 3.5 percent to 170,000 barrels per day, Alaska natural gas production increased 18 percent to 45 million cubic feet per day. (The company produced 16,000 barrels of natural gas liquids per day during the second quarter, equal to the first quarter and up slightly over the second quarter of last year.)
ConocoPhillips attributed the increased natural gas production in the quarter to the two cargoes of LNG shipped from the previously dormant Kenai Peninsula facility.
By comparison, ConocoPhillips produced 191,000 barrels per day of oil from the Lower 48 during the second quarter. The figure is a dubious milestone: the first time in recent memory that ConocoPhillips produced more oil from the Lower 48 than from Alaska.
Historically, ConocoPhillips produced more oil in Alaska and more natural gas in the Lower 48. But with the growing influence of unconventional oil plays such as the Eagle Ford shale and the Bakken formation in the ConocoPhillips portfolio, the Lower 48 now leads Alaska in production of both commodities. ConocoPhillips produced nearly 1.5 billion cubic feet of natural gas per day in the Lower 48 during the second quarter.
Companywide, ConocoPhillips produced nearly 1.6 million barrels of oil equivalent per day during the second quarter - 605,000 bpd of oil and 4.1 million cubic feet per day of gas.
In Alaska, ConocoPhillips reported an average liquids price of $108.93 per barrel for the second quarter, up from $106.09 per barrel in the second quarter of 2013. The price includes both crude oil and natural gas liquids. In the Lower 48, ConocoPhillips reported an average crude oil price of $93.73 per barrel during the quarter. Companywide, ConocoPhillips reported an average crude oil price of $103.53 per barrel in the quarter.
Alaska natural gas prices rose even faster than oil, to $6.03 per thousand cubic feet for the quarter, up from $4.03 per thousand cubic feet during the second quarter of 2013. The large increase reflects the resumption of liquefied natural gas exports from the Kenai terminal, which are executed on a different set of contracts than the natural gas sold to local utilities.
By comparison, ConocoPhillips reported an average natural gas price of $4.43 per thousand cubic feet in the Lower 48 and $6.66 per thousand cubic feet companywide.
Spending upThe earnings also reflect the influence of increased spending.
ConocoPhillips spent $390 million on capital projects in Alaska during the second quarter, down from $415 million spent in the first quarter but up from $283 million in the second quarter of last year. Through the first half of 2014, ConocoPhillips has spent $805 million on capital projects in Alaska, up from $545 million over the same period last year.
The much-publicized increase in capital spending includes work at Kuparuk Drill Site 2S and the Kuparuk 1H Northeast West Sak or NEWS project, and the Alpine West satellite. Construction on the Alpine West or CD-5 satellite “has begun and fabrication is under way,” Executive Vice President for Exploration and Production Matt Fox said during an earnings call. The project remains “on track” for startup in late 2015.
ConocoPhillips also recently commissioned a new drilling rig for the Kuparuk River unit.
The projects are expected to cost some $2 billion altogether, and could add more than 40,000 gross barrels of oil equivalent per day in production by 2018, the company said.
The balance between those capital projects, the profits ConocoPhillips is earning in Alaska and the taxes and royalties the company is paying in Alaska are at the heart of a debate about whether to keep the More Alaska Production Act, or repeal it. The quarterly earnings are the last figures available to the public before Alaska voters decide the fate of the fiscal regime in an upcoming referendum. “We certainly hope the legislation prevails,” Fox said. “We believe it’s important for continued oil and gas development in Alaska. We have identified and are actively developing opportunities for growth.”
ConocoPhillips also reported $135 million on depreciation, depletion and amortization expenses in Alaska during the second quarter, somewhat even with prior quarters.